CHAPTER TEN ACCOUNTING FOR PURCHASES AND CASH PAYMENTS

CHAPTER TEN ACCOUNTING FOR PURCHASES AND CASH PAYMENTS

PURCHASES ü Merchandise acquired for resale: • Inventory items to sell to customers ü Procedures and documents vary depending on the size of the business. ü Can be made “on account” or for cash

PURCHASING PROCESS DOCUMENTS PURCHASE REQUISITION Oh no! I am all out of 1 pound bags of M&M’s. I better call the inventory manager!

PURCHASE REQUISITION § A form used to request the purchase of merchandise or other property § Can be prepared by any authorized person § One copy to the Purchasing department § One copy to the Accounting department § One copy kept by the department preparing the requisition

PURCHASING PROCESS DOCUMENTS PURCHASE REQUISITION PURCHASE ORDER Let’s see, I’ll order 40, 000 cases of Plain & Peanut M&M’s from our supplier right away. Plain is the teacher’ s favorite candy!

PURCHASE ORDER § A written order to buy goods from a specific vendor § Purchasing department reviews and approves the purchase requisition and prepares a purchase order: • • One to vendor One to the Accounting department One kept in the Purchasing department Copies may also be sent to the receiving area and to the department initiating the purchase.

PURCHASING PROCESS DOCUMENTS PURCHASE ORDER RECEIVING REPORT I’m not going to sign anything until I fill out this receiving report so hold your horses!

RECEIVING REPORT § Prepared by the receiving clerk § Indicates what has been received: • Including date of receipt, and • condition of the goods § This report will be compared with the purchase order and requisition to determine if items ordered were received in good condition before payment is approved.

PURCHASING PROCESS DOCUMENTS I wonder if I put on enough deodorant today. . RECEIVING REPORT PURCHASE INVOICE Looks like we got all the M&Ms we ordered. We better pay the invoice.

PURCHASE INVOICE § Prepared by the seller § As a bill for the merchandise shipped: • Seller calls it a sales invoice. • Buyer calls it a purchase invoice. § Before payment is made, Accounting department compares the purchase invoices with: • Purchase Requisition • Purchase Order • Receiving Report

Cash Discounts § Available if the bill is paid within the discount period § Seller calls it a Sales Discount. § Buyer calls it a Purchase Discount. re a e l w l , a r te we c p ha so se c his YER rcha t In BU pu ts. them coun dis

TRADE DISCOUNTS § Often offered by manufacturers and wholesalers § Reduction from the list or catalog price: • Discounts offered to different classes of customers § Buyer and Seller both record the transaction at the NET amount (after the discount).

Merchandise Purchases Accounts All Income Statement Accounts PURCHASES DISCOUNTS PURCHASES RETURNS & ALLOWANCES FREIGHT-IN

PURCHASES ACCOUNT Used to record the cost of merchandise purchased PURCHASES DR. + CR. The account is debited when merchandise is purchased.

PURCHASES ACCOUNT Used to record the cost of merchandise purchased PURCHASES DR. CR. + The account is only credited during the closing process.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Purchases Cash PR DEBIT CREDIT 1000 00 ( cash purchase of M&M’s)_ Example: Purchased $1, 000 of M&M candies for cash 1000 00

GENERAL JOURNAL DATE 1 2 3 4 5 6 DESCRIPTION Purchases Accts. Payable/Vendor PR DEBIT CREDIT 1000 00 (Purchase 40, 000 cases of M&Ms on account) What if the purchase had been made on account? 7 We would credit the 8 9 account instead of cash. 10 11 Accounts Payable 1, 000 00

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Purchases Accts. Payable/Vendor PR DEBIT CREDIT 1, 000 00 Made purchase on account The specific supplier is identified. 1, 000 00

Purchase Returns And Allowances CONTRA-PURCHASES account used to record purchase returns and purchase allowances. PURCHASES RETURNS & ALLOWANCES DR. CR. + The account is credited for the amount of returns and allowances.

GENERAL JOURNAL DATE DESCRIPTION 1 2 3 4 5 6 7 8 9 10 11 PR DEBIT CREDIT Example: $200 of the M&Ms purchased on account, were crushed and returned to the supplier. Crushed M&M’s!! Your killing me!

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Accts. Payable/Vendor PR DEBIT CREDIT 200 00 Accounts Payable is debited. The specific vendor is identified.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Accts. Payable/Vendor Pur. Returns & Allow. 200 00 (Returned M&Ms due to defect) Purchases Returns & Allowances is credited. This account will be shown as a deduction from the Purchases account on the Income Statement.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Example: If our supplier told us to keep the crushed M&Ms and he would give us a price reduction of $145 because of the defects, we would. . .

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Accts. Payable/Vendor PR DEBIT CREDIT 145 00 Accounts Payable is debited to reflect the price reduction.

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION PR DEBIT CREDIT Accts. Payable/Vendor Purchase Returns & Allow. 145 00 (Allowance for crushed M&Ms) 5 6 7 8 9 10 11 Purchases Returns & Allowances is credited. Same as the entry for Returns!

Purchases Discounts CONTRA-PURCHASES account used to record cash discounts allowed on purchases. PURCHASES DISCOUNTS DR. CR. + The account is credited for the discount granted by the vendor for prompt payment.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Example: We purchased $100 of pink toilet paper on account with credit terms 2/10, n/30 and payment is made within the discount period.

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION Accts. Payable/Vendor Purchases 5 6 7 8 9 10 11 Accounts Payable is debited And Purchases is credited for the entire amount of the purchase. PR DEBIT CREDIT 100 00

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Accts. Payable/Vendor Cash PR DEBIT CREDIT 100 00 If payment is made within 10 days then Cash is credited for the actual amount paid, $98. ($100 - $2 discount) 98 00

GENERAL JOURNAL DATE 1 2 3 4 DESCRIPTION PR DEBIT CREDIT Accts. Payable/Vendor Cash Purchases Discounts 100 00 Paid for toilet paper w/2% disc 5 6 7 8 9 10 11 Purchase Discounts is credited for the discount amount, $2 ($100 x 2%). 98 00 2 00

FREIGHT-IN ADJUNCT-PURCHASES account used to record transportation charges on merchandise purchases. FREIGHT-IN DR. CR. + The account is debited for transportation charges.

TRANSPORTATION CHARGES § Expressed as FOB (Free on Board) • FOB Shipping Point: o Buyer pays for transportation. o Freight charges are either listed on invoice or sent as a separate bill. • FOB Destination: o Seller pays for transportation.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION PR DEBIT CREDIT Example: Merchandise was purchased on account for $400 plus freight charges of $38.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Purchases PR DEBIT CREDIT 400 00 Purchases is debited only for the cost of the merchandise.

GENERAL JOURNAL DATE DESCRIPTION PR DEBIT CREDIT 1 2 3 4 Purchases Freight-In 5 Freight-In is debited for the transportation costs. 6 7 8 9 10 11 400 00 38 00

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Purchases Freight-In Accts. Payable/Vendor PR DEBIT CREDIT 400 00 38 00 Made purchase on account Accounts Payable is credited for the entire purchase price (merchandise + freight). 438 00

GENERAL JOURNAL DATE DESCRIPTION PR DEBIT CREDIT 1 2 3 4 5 6 7 8 9 10 11 What if the freight charges were on a separate bill from the transportation company?

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Purchases PR DEBIT CREDIT 400 00 Purchases is again debited for the cost of the merchandise.

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Purchases Accts. Payable/Vendor PR DEBIT CREDIT 400 00 Made purchase on account Accounts Payable is credited for the amount due to the supplier. 400 00

GENERAL JOURNAL DATE 1 2 3 4 5 6 7 8 9 10 11 DESCRIPTION Purchases Accts. Payable/Vendor PR DEBIT CREDIT 400 00 Made purchase on account A separate journal entry is made to record the freight charges. 400 00

GENERAL JOURNAL DATE DESCRIPTION 1 2 3 4 Purchases Accts. Payable/Vendor 5 Freight-In Accts. Payable/Vendor 6 7 8 9 10 11 PR DEBIT CREDIT 400 00 Made purchase on account 38 00 Freight charges on purchase Accounts Payable is credited, but the vendor is the transportation company. 38 00

GROSS PROFIT § Also called Gross Margin § =Net Sales - Cost of Goods Sold § Tells management the amount of sales dollars available to cover expenses, after covering the cost of the goods sold.

GROSS PROFIT FORMULA: NET SALES COST OF GOODS SOLD Let’s look at an example. GROSS PROFIT Oh goodie, I love samples! Oops, I mean examples!

EXAMPLE During the month, 20 hats are sold for $10 each. The hats were originally purchased for $7. 50 each. NET SALES COST OF GOODS SOLD GROSS PROFIT $200 20 hats @ $10 each = $200 in Sales There were no Sales Returns & Allowances or Sales Discounts, so NET SALES = $200.

EXAMPLE During the month, 20 hats are sold for $10 each. The hats were originally purchased for $7. 50 each. NET SALES COST OF GOODS SOLD $200 $150 20 hats @$7. 50 each = $150 GROSS PROFIT

EXAMPLE During the month, 20 hats are sold for $10 each. The hats were originally purchased for $7. 50 each. NET SALES COST OF GOODS SOLD GROSS PROFIT $200 $150 $50 The Gross Profit on these 20 hats was $50. This $50 is used to cover expenses.

COMPUTATION OF GROSS PROFIT

Here is another example of figuring Gross Profit. This is for: The Fat Candy Store Sales $200, 500 1, 200 Sales Returns & Allowances Purchases 105, 000 800 Purchases Returns & Allowances Let’s compute Purchases Discounts 1, 000 the Gross Profit! Freight-In 300 26, 000 Merchandise Inventory, 1/1/-Merchandise Inventory, 12/31/-- 18, 000

Computation Of Gross Profit STEP #1: COMPUTE NET SALES. FORMULA: SALES RETURNS & ALLOWANCES

Sales Less: Sales returns & allow Net Sales $200, 500 $1, 200 This is the final price we charged our customers for the merchandise. $199, 300

Computation Of Gross Profit STEP #2: COMPUTE GOODS AVAILABLE FOR SALE. FORMULA: BEGINNING INVENTORY + COST OF GOODS PURCHASED

Sales Less: Sales returns & allow. Net Sales Cost of Goods Sold: Merchandise Inv. , Jan 1 Purchases Less: Purch. ret. & allow. Purchases discounts Net purchases Add freight-in Cost of goods purchased Goods available for sale $200, 500 -$1, 200 $199, 300 $26, 000 $105, 000 $ 800 1, 000 - 1, 800 $103, 200 +300 +103, 500 $129, 500 This is the cost of ALL the goods that were offered for sale during the entire period.

Computation Of Gross Profit STEP #3: COMPUTE COST OF GOODS SOLD. FORMULA: GOODS AVAILABLE FOR SALE ENDING INVENTORY

Sales Less: Sales returns & allow. Net Sales Cost of Goods Sold: Merchandise Inv. , Jan 1 Purchases Less: Purchases ret. & allow. Purchases discounts Net purchases Add freight-in Cost of goods purchased Goods available for sale Less Merch. Inv, Dec. 31 $200, 500 -$1, 200 $199, 300 $26, 000 $105, 000 $ 800 1, 000 -1, 800 $103, 200 +300 +103, 500 $129, 500 -18, 000 Out of the $129, 500 of merchandise available to sell, $18, 000 was not sold.

Sales Less: Sales returns & allow. Net Sales Cost of Goods Sold: Merchandise Inv. , Jan 1 Purchases Less: Purchases ret. & allow. Purchases discounts Net purchases Add freight-in Cost of goods purchased Goods available for sale Less Merch. Inv. , Dec. 31 Cost of Goods Sold $200, 500 -$1, 200 $199, 300 $26, 000 $105, 000 $ 800 1, 000 -1, 800 $103, 200 +300 +103, 500 $129, 500 -18, 000 From that we can determine that $111, 500 of merchandise was sold. 111, 500

Computation Of Gross Profit STEP #4: COMPUTE GROSS PROFIT. FORMULA: NET SALES Finally, I get to figure how much PROFIT I made! COST OF GOODS SOLD

Sales Less: Sales returns & allow. Net Sales Cost of Goods Sold: Merchandise Inv. , Jan 1 Purchases Less: Purchases ret. & allow. Purchases discounts Net purchases Add freight-in Cost of goods purchased Goods available for sale Less Merch. Inv. , Dec. 31 Cost of Goods Sold Gross Profit $200, 500 -$1, 200 $199, 300 $26, 000 $105, 000 $ 800 1, 000 Youza! I’m rich! -1, 800 $103, 200 +300 +103, 500 $129, 500 -18, 000 The merchandise was sold for $87, 800 more than its cost! -111, 500 87, 800

Posting Purchase Transactions In The General Ledger (Are exactly the same as we have studied in previous chapters!) § In the ledger account: • • Step 1: Enter the date. Step 2: Enter the amount of the transaction. Step 3: Update the balance. Step 4: Enter the journal page number. § In the journal: • Step 5: Enter the ledger account number.

Accounts Payable Ledger § § § A separate “subsidiary” ledger Individual accounts for each supplier Often numbered Filed either alphabetically or numerically Accounts Payable account in the General Ledger is the “controlling account. ”

Posting To The Accounts Payable Ledger § In the Accounts Payable ledger: • • Step 1: Enter the date. Step 2: Enter the amount. Step 3: Enter the new balance. Step 4: Enter the journal page number. § In the journal: • Step 5: Enter a slash (/) followed by a check mark ( /) in the PR column.

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION April 4 Purchases Accts. Pay/Choc. Supply PR DEBIT CREDIT 3, 300 00 Invoice No. 631 Let’s review the posting for this transaction. Okay. . I’m ready when you are!

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION April 4 Purchases PR DEBIT CREDIT 501 3, 300 00 Accts. Pay. /Choc. Supply Invoice No. 631 A $3, 300 debit is posted to the Purchases account in the usual manner. Okay. Nothing new so far. . .

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION April 4 Purchases Accts. Pay. /Choc. Supply PR DEBIT CREDIT 501 3, 300 00 Invoice No. 631 The credit is posted to the Accounts Payable controlling account in the General Ledger. In the General Ledger? Well show me, please. . .

FOUR-COLUMN ACCOUNT Account: ACCOUNTS PAYABLE DATE ITEM 20 -Apr. 1 Balance 4 PR DR. Account No. 202 BALANCE CR. DR. CR. 4, 800 J 6 3, 300 This entry is posted in the same manner as all other general ledger postings. Easy Squeasy. . 8, 100

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION April 4 Purchases Accts. Pay. /Choc. Supply PR DEBIT CREDIT 501 3, 300 00 202 Invoice No. 631 The Accounts Payable account number is placed in the PR column. This no. came from the General Ledger? Right!

GENERAL JOURNAL 1 2 3 4 5 6 DATE DESCRIPTION April 4 Purchases Accts. Pay. /Choc. Supply 10 11 202 Invoice No. 631 Now we need to post to the individual supplier’s account. 7 8 9 PR DEBIT CREDIT 501 3, 300 00 Finally! 3, 300 00

Name: ACCOUNTS PAYABLE LEDGER Chocolate Supply, Inc. Address: 2100 West Main Street, Hershey, IN 47304 -8139 DATE 20 -Apr. 4 ITEM PR DEBIT J 6 CREDIT 3, 300 Date is entered, Amount is recorded, Balance is updated, and Journal page number is referenced. BALANCE 3, 300

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION April 4 Purchases Accts. Pay. /Choc. Supply PR DEBIT CREDIT 501 3, 300 00 202/ 3, 300 00 (Invoice No. 631) A slash (/) is entered along with a check mark ( ), which indicates the entry has been posted to the subsidiary ledger. I live for making those marks!

GENERAL JOURNAL 1 2 3 4 DATE DESCRIPTION May 4 Accts. Payable/Televax PR DEBIT CREDIT 200 00 Purchases Ret. & Allow. (Returned Merchandise) 5 6 7 8 9 10 11 Now let’s look at the posting for a Purchase Return entry. 200 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION May 4 Accts. Payable/Televax PR DEBIT CREDIT 202 / 200 00 Purchases Ret. & Allow. (Returned Merchandise) The $200 debit is posted to the Accounts Payable controlling account and to the Subsidiary ledger account for Televax. 200 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION May 4 Accts. Payable/Televax PR DEBIT CREDIT 202 / 200 00 Purchases Ret. & Allow. 501. 1 (Returned Merchandise) Purchases Returns and Allowances is posted in the normal manner. Its account number is recorded in the PR column. 200 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT April 10 Accts. Payable/B. B. Small 4, 800 00 Cash (Made payment on account) Cash payment transactions are posted in a similar manner. 4, 800 00

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT April 10 Accts. Payable/B. B. Small 202/ 4, 800 00 Cash 4, 800 00 (Made payment on account) The debit is posted to the Accounts Payable controlling account and to the Subsidiary ledger account for B. B. Small.

GENERAL JOURNAL 1 2 3 4 5 6 7 8 9 10 11 DATE DESCRIPTION PR DEBIT CREDIT April 10 Accts. Payable/B. B. Small 202 / 4, 800 00 Cash 101 (Made payment on account) Cash is posted as usual. 4, 800 00

Schedule Of Accounts Payable § Listing of suppliers and their balances § Prepared to verify that the sum of the Accounts Payable Ledger balances equals the Accounts Payable balance in the General Ledger. § Usually prepared at the end of the month

Northern Micro Schedule of Accounts Payable April 30, 20 -Chocolate Supply, Inc. Datasoft BB. Small. Televax, Inc. $3, 300 2, 500 800 5, 300 $11, 900 This should be the balance in the Accounts Payable controlling account in the General Ledger.